U.S. Treasury Secretary Timothy Geithner will try to strengthen bilateral ties with India during talks in New Delhi this week, but his visit may be overshadowed by Washington’s tense relationship with China.

Both the United States and India will be simultaneously pushing trade and foreign exchange agendas with China, as they discuss cooperation on infrastructure development and financial markets.

Geithner on Saturday delayed an April 15 report to Congress on whether China manipulates its yuan currency, pledging to work instead with Group of 20 members – India and China included — to persuade Beijing to de-peg its yuan from the dollar.

Foreign Minister S.M. Krishna will be in Beijing for talks this week on a range of issues, smoothing out trade flows and reducing non-tariff trade barriers to shrink a $16 billion trade deficit with China.

“There is one potentially big issue of common interest between the U.S. and India – the Chinese exchange rate,” said Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, a Washington think tank.

“China’s undervalued exchange rate affects emerging market economies like India even more than it does the United States,” he said.

Subramanian added that India might be persuaded to support a broad-based effort aimed at currency rebalancing in a large, global forum like the G20 grouping of wealthy and big emerging economies.

China has intervened in currency markets to keep the yuan steady against the dollar since July 2008 at a rate that critics say effectively provides a lucrative subsidy to Chinese exports. India maintains a floating exchange rate policy.

MORE THAN A COUNTERBALANCE

But India remains reluctant to provoke China and won’t want to be seen as openly supporting U.S. demands for a rise in the yuan.

“The Indians have been pissed-off in the past about being used by the U.S. to try to counterbalance China. They don’t want to be in that position,” said Stephen Cohen, a senior fellow at the Brookings Institution in Washington.

U.S. Treasury officials have downplayed the China currency issue as a major topic for the talks, referring to it only as a discussion on rebalancing the global economy, which G20 leaders pledged to try to do last year at a summit in Pittsburgh.

Most economists see that goal as impossible without a stronger yuan.

Geithner, speaking to a small group of Indian journalists on Thursday, sidestepped questions about the yuan rate, instead lauding India for its flexible currency, more open economy and less dependence on exports.

“I’m going to be very careful for reasons you understand not to talk about China in India, or to talk about China to the Indian press in Washington,” he said, according to a transcript of the briefing released by the Treasury.

LIMITED SCOPE

Geithner’s main goal in the talks in India on Tuesday will be to give more prominence to U.S.-Indian relations, which have taken a back seat to Washington’s ties with China in recent years.

In an effort to smooth relations with India, U.S. President Barack Obama last November hosted Indian Prime Minister Manmohan Singh for a state visit in Washington.

“It is not about doing any signing agreements or trying to procedure any specific short term deliver position. It is about the long view.”

The talks, which are more limited in scope than an annual U.S.-China dialogue, will cover three main areas: economic stability, infrastructure development and the financial sector. Geithner and Finance Minister Pranab Mukherjee will lead the discussions.

The U.S. Treasury chief later will meet with Singh.

Federal Reserve Vice Chairman Donald Kohn will be part of the U.S. delegation, ensuring high-level interaction between the two countries’ central banks. On Wednesday, Geithner travels to Mumbai to hold meetings with top Indian executives and entrepreneurs.

“Economic relations in India largely are driven by entrepreneurs and private players. A key goal should be how the leaders might give better policy signals to the private sector,” said Arvind Panagariya, a professor of Indian politics and economics at Columbia University in New York.

While there are no major trade disputes between the United States and India, the talks will focus on some areas of disagreement, including India’s 26-percent limits on foreign investments in its insurance sector, and U.S. restrictions on sales of certain high-technology exports.

Modernizing India’s financial sector also will be on the agenda, but analysts said that India will move slowly in this area, especially given the damage caused during the financial crisis that followed rapid U.S. deregulation.

U.S. officials want to discuss ways to increase American companies’ participation in India’s vast infrastructure building needs, which analysts estimate at up to $1 trillion.

(Reporting by David Lawder; editing by Paul Simao)